Scenario 1:

Plainview Packing Company (PPC) is evaluating the following two projects. Each project has an upfront cost of $100,000, and each project will generate annual returns over a six-year period. At the end of six years all assets associated with each project will have no value and there will be no end-of-project disposal costs. Ignore the effect of taxes in your analysis.

Project Happy

Up-front cost (t=0)	Year 1 return (t=1)	Year 2 return (t=2)	Year 3 return (t=3)	Year 4 return (t=4)	Year 5 return (t=5)	Year 6 return (t=6)
(100,000)	40,000	40,000	40,000	10,000	10,000	10,000

Project Bovina

Up-front cost (t=0)	Year 1 return (t=1)	Year 2 return (t=2)	Year 3 return (t=3)	Year 4 return (t=4)	Year 5 return (t=5)	Year 6 return (t=6)
(100,000)	10,000	10,000	10,000	50,000	50,000	50,000

Based on the above, provide the following:

Weighted Average Cost of Capital	NPV Project Happy	NPV Project Bovina
5%
10%
15%

Based this information, what can you conclude about the effect of variations in interest rates on the evaluation and selection of projects?

Scenario 2:

PPC is considering Project Claude with an up-front cost of $93,715 and benefits of $18,000 per year for the next seven years.

Using a weighted average cost of capital of 6% what is the net present value (NPV) of this project?
What is the internal rate of return (IRR) of this project?

Compare and contrast the use of NPV and IRR in evaluating capital budgeting projects.

Which of these measures would you use for evaluating projects, or would you make use of both measures? Why?

How important are assumptions in the specification and evaluation of capital budgeting projects?

Why is evaluation of the realism of those assumptions an integral part of evaluating any capital budgeting project?

How and why is a post project audit of the assumptions that are part of any capital budgeting project useful for keeping those assumptions realistic?

Why do you think such post project audits rarely take place?